Government-subsidized student loans: economic costs and political benefits

Government Subsidized Student Loans Have Economic Costs but Political Benefits

Higher education has become increasingly important in the contemporary world scenario today where globalization has led to a higher need for a skilled labor force that is mobile and that is well-versed in the academic disciplines followed all over the world. In fact university education is starting to be seen as a hallmark for success, even though there are college drop outs who have become billionaires.

The recent spate of universities and higher education institutes has led students and their parents to believe that university education is mandatory for all those who want a nice career and income in their lives, and has increasingly blurred the distinction between necessary and mandatory education, compared to professional education that is mainly to benefit the individual.

In light of this dilemma, yet another question arises of helping students gain this education with the availability of subsidized student loans. This issue has gained precedence in the preceding years as the tuition fees have escalated and America is battling a recession, with several policy considerations to keep in mind.

This paper has looked at the legislation that allows these loans and the various other kinds of loans and alternatives that are available to students that help them meet their financial needs. The paper then looks at the specific amendments that the Obama government has proposed including larger Pell Grants, an expanded income-based repayment program as well as the fact that the government is talking about eliminating middlemen and providing loans directly to students.

The economic analysis in terms of costs and benefits to individuals and country concluded that subsidies have led to moral hazard while the quality of education as well as the numbers graduating has gone down. Additionally, the subsidies have led to misallocation of resources as more and more colleges are popping up to take advantage of federal money, while the rest keep on hiking up tuition fees in a bid to get their students to apply for more financial aid, and hence more dollars. The subsidies therefore are indicated to be the reason why the fee is increasing by leaps and bounds.

The political analysis of the loans and subsidies follows, where candidate looking for popular votes are not indicating the economic costs of subsidies and are looking at direct loans or lack of federal intervention, leaving the higher education sector up to their own market devices.

Finally the statement that current presidential candidates have made is mentioned, along with a running analysis of what these entail. The paper then concludes by agreeing to the hypothesis that while the education subsidies have high economic costs, it is the will of the politicians that prevents them from taking any radical measures to free the industry from intervention.

Calls have been made to regulate the higher education industry and to prevent them from raising their tuition fees to exorbitant levels, but the idea that the subsidies are accruing a great cost to the economy is valid. Experts fear financial suffocation of students, who upon finding access to subsidized loans easy enroll in colleges, only to emerge with a mounting debt burden, and in some cases a degree they don't even need. Analysts are indicating that the student loan bubble might burst with implications that will be similar to what happened in the housing crash, and in light of this there are alternative discussed which look at how the subsidized loan regime is expected to change.

The paper is indicative of the real life trade-off leaders and publics have to make, and concludes with the predictions of what the future of these subsidies is going to be like.

Contents

Executive Summary 2

Introduction 6

Government Higher Education Loan Programs 13

Stafford Loans 16

Federal student loans to parents 17

Federal Direct Student Loans 17

Private student loans 18

Private student loan types: 19

Recent Legislation in Student Debt Laws 22

Larger Pell Grants 23

Expanded Income-Based Repayment (IBR) 24

Other Student Loan Facilities 25

Economic Analysis of Loans 26

Individual Benefits and Costs of Debt Burden 28

Benefits of subsidized loans to individuals 28

Costs of Debt Burden: 30

Country's Benefits and Costs of Subsidizing Student Loans 32

The benefits of subsidizing student loans to the country 32

The costs of subsidizing student loans to the country 35

Political Analysis of Loans 37

Politicians/parties most closely associated with programs 39

Arguments used to support programs 44

Past experiences of those trying to cut programs 45

Current candidates' statements on loans 47

Summary Analysis 51

Review 52

Future predictions 54

References 59

Introduction

This paper will look at the higher education sector with particular emphasis on financing of studies in these places. It will then set to argue that although there are high economic costs associated with subsidies, there is political will for these loan subsidies to continue and they will.

Education, defined as the process of receiving teaching, training and learning by the Oxford Advanced Learner's Dictionary ( Oxford Advanced Learner's Dictionary), has largely become a discipline of national concern. While primary education is compulsory and paid by the government, higher education too, is being considered increasingly to be within its domain, under the 'No Child Left behind Act'. As the U.S. government is intervening more in the matters of higher education it has given rise to a debate as to the advantages and disadvantages of such an intervention, and it has risen to public importance as the government, in an aim to popularize university education facilitates students by providing them with subsidized loans for their education.

Student loans are an instrument with which the government tries to make acquisition of higher education easier as costs of acquiring university education escalate, to the current average of $35,000 per annum. (Kogan, 2011) The plan under which students are given education loans is the Income-Based Repayment System which works as an easy installment method of loan repayment through which students can better match their loan repayment installments to their income.

One of the methods in which the government has subsidized loans and make it easier for students to acquire university education include the 2009 proposal by President Obama which was geared towards the elimination of loans through private financial institutions such as Sally Mae, and reallocating them as federal loans or direct loans, straight from the government treasury. Additionally Pell grants, which are need-based grants given to low income students pursuing higher studies were proposed to be increased and making the Pell grants an entitlement program that would not need to be budgeted separately by the Congress. (McCluskey & Edwards, 2009)

Additional measures have also been taken by the government that have further intensified the debate against and for government subsidized loans. These include acts such as grants and assistance for military personnel pursuing university education as well as granting an additional sum of $30 billion aimed at furthering research at universities. Breaks in the income tax code have increased as a result of these government policies which include lifetime learning tax credit, scholarship and educational facility bond. Moreover, both the Republicans as well as the Democrats seem to be pro-this policy, therefore whichever government comes into power, student subsidies are expected to remain, and in some cases increase in number. This can be proved from the fact that where there were 7 special breaks in income tax code in 1995, there were 16 in 2009.

There are arguments in favor as well as against this stance where this paper aims to analyze in detail what the specific advantages and disadvantages are in terms of economic costs and benefits, and in terms of political costs and benefits.

Some of the key figures that support this argument are that according to UNESCO, each additional year of schooling increase GDP growth by about 0.37%, and that an additional year of schooling increases an individual's income by 10%, implying that expenditure on education is a worthwhile investment that can help in eliminating many social and economic issues that are faced by the world today. (United Nations Educational, Scientific and Cultural Organization, 2011)

With particular reference to student loans, proponents argue in favor of the student loan subsidies where the subsidies are expected to encourage spending on ailing sectors, and as the spending increases, the proponents argue that jobs will be created and the economy will get a boost. Democratic Congress representatives such as Hansen Clarke are also proposing this view the subsidies are expected to boost graduates in being able to invest in business rather than spending much of their initial income in repaying the loan. There is also the advantage that graduates, in order to repay their loans seek immediate employment, which leaves them with no room to experiment with their own ventures, limiting entrepreneurship. Hence, subsidized governments loans can help them repay their loans early and invest themselves in new businesses that can help create more jobs in the economy and pull it out of recession. (Wolfers, 2011)

The proponents would further argue that the subsidies were meant to lure youth towards higher education, and help them get better employment opportunities and a chance to earn higher. Higher education is taken to be a safeguard against unemployment with statistics indicating that unemployment among university graduates was 4.4% whereas for people who had not completed secondary school, unemployment was near 11.5%. (The Economist, 2011)

Although the phenomenon, with the state supporting education may sound ideal, and other emerging countries too might try to emulate the model in an effort to bring their economies up to par, several contrary view points have been voiced by critics that question the economic and political feasibility of the subsidized student loans.

Foremost is the startling figure of $1 trillion worth of outstanding student loans. Secondly there are arguments that this loan is for students who have already completed their studies and hence subsidizing it further will not encourage more students to participate in higher studies. Thirdly, an argument is made that the objective of the subsidy to was to increase financial stimulus, as indicated by the government. However, this objective cannot be achieved as the subsidy will go into their savings, and there are other, better options that can be utilized in order to boost spending in the economy. Fourth, there are criticisms made based on the utility of higher education in it, where scholars have been voicing their concerns over the fact that higher education is not meant for all students, and its exclusivity is maintained by its higher costs. Additionally, students who have different aspirations, and may not need the university degrees, might find themselves in a situation where they realize that they have spent money on majors that they do not even need. (Orr, 1991)

The debate has also arisen mainly because it is the Tax Payer's money that is being allocated, and there are concerns, that this additional sum is going from all tax payers to help those people who will already have a chance of earning 75% more than non-university students in their lifetime. (McCluskey & Edwards, 2009)

Education is taken to be a competitive industry, therefore the government when it argues that students need help to cope with rising college tuition is in fact aiding in the increase of tuition fees. In a free market, when student demand for university education rises, prices rise, and students who can't afford to invest don't. When prices go up, more universities come in and prices fall. The key here is that the supply that rises is able to provide the standard of education that is required by the market. However, when the government comes in to subsidize these loans, many of which are directly given to the universities where students have gotten admission in, it indirectly leads to an increase in fees, as universities hike up fees to get as many of the federal funds as possible. In fact this practice of depositing the sum directly at the University, to be granted to students at its approval has led to a lot of fraudulent universities propping up, that have, till date embezzled millions of government dollars. (McCluskey & Edwards, 2009)

Another part of the story is that students with loans are increasingly facing the risk of defaulting, as there are fewer jobs in the economy. The situation is deemed to be dire, and need of more intervention, especially as bankruptcy laws were reformed by the 2005 Bankruptcy Reform Bill which disallowed students to declare bankruptcy on private loans. (Madison, 2011)This in turn meant that banks and other financial institutions that were lending out money, could do so increasingly as the students would not be protected, and there was no way in which the loaned amount could be waivered, leading to banking greed, and students being indebted for a greater part of their lives. (The Economist, 2011)

Some of the other reasons for the allowing of these loans is the President and The First Lady's own college experiences, that make them more open to students' problems with debt along with the fact that tuition fees have been rising steadily in both the public and the private sectors making the case for increased subsidies to help the students to get a higher education.

While there are drawbacks of these policies that have been promulgated by the state of America, there are advantages as well, and this paper aims to consolidate the views of experts in periodicals, and journal articles in order to understand fully the concept of subsidized loans, and analyze whether such a scheme has been favorable in terms of higher aggregate advantages as compared to aggregate disadvantages.

The debate about whether or not to subsidize student loans is part of a greater problem. In fact it is a symptom pointing to a greater issue of the ubiquity of college education among all youngsters. While it is a universally accepted fact that primary and secondary education alleviates social problems and is the key to uplifting society, higher education, is meant to mainly increase the income potential of the few who chose to bear the expenses and learn more about skills and capabilities that can help them earn better than the rest.

This is the core from which the issues are diverging. Milton Friedman also argues along similar lines, where he indicates that there is a minimum level of education till which provision of education by the state is needed for what he defines as the 'neighborhood effect'. (Friedman, 1955) He implies that a certain level of literacy is needed among people in a society in order to uphold democracy and in order to comprehend the rights and duties that are available to them. This is the neighborhood effect that the government is willing to pay for from the tax payer's money, as it is for the larger good of society. However, at the same time, higher education serves the purpose of increasing economic benefits to the students who enroll in universities. Therefore, it serves no basic societal purpose in increasing or improving the 'neighbor affect', and hence, according to Milton should be left up to competitive market forces which will define its prices and quantity supplied and demanded.

There are other experts also who share in the view that the idea of everyone attending college is just a part of public greed, where all students wanting to earn more than others enroll in college even if they do not have the aptitude for such sort of education. The growing rates of government subsides plays a part in this, as students who cannot afford this sort of investment in their careers, end up paying a smaller fraction and getting enrolled into colleges. Although this argument may seem to be the root of Marxian conflict arguments which imply that the elite restrict the flow of information to the proletariat and constrain them in their lower income ranks, looking to maintain the status quo. (Wolff, 2010) But even so, statistics have started to indicate that students who get into colleges on the basis of government support, and are actually not ready for college can be seen by the fact that remedial classes are needed increasingly in colleges in order to bring the standard of students up to par with that required by the university. (McCluskey & Edwards, 2009)

There again is the argument that university education might also not be suited for those who can afford to go to college so government subsidies might not be the only factor in students unsuited to university education getting enrolled. Even then the base argument remains the same, if it is not economically feasible in the long run, students who can't afford college will eventually drop out, but in the event of a student who has availed government subsidies, he or she will be wasting precious tax-payer money.

There are others, such as David Orr who also argues that it is a result of the rat race to grab as many economic resources as possible (Orr, 1991), and the greed that "those with a college degree will earn, on average, 75% more during their lifetime than those with just high-school degrees." (Day & Newburger, 2002) There are indications that university enrollment in a span of twenty years, 1986 and 2006 has increased by 48%, which is an extraordinary number, but really, does it suggest that things have improved and that there is higher literacy in society? Does it show that resources are being utilized as needed? But have those enrollment increases been an entirely good thing?

There are calls for a national discussion on higher education, and rather than having all politicians follow the bandwagon blindly, of building up their public image by granting loans to students, who will then become their allies for the rest of their lives. Moreover, a college degree is not the only guarantee of higher incomes, which everyone has a right to. As baby boomers are retiring there is a need for skilled labor trained in technical aspects rather than broad disciplines to operate the economy. And as experiences baby boomers start to retire, there will be an increased demand for technically skilled labor, providing yet another avenue for people to earn a higher income. (Kogan, 2011)

Hence there is a need to stop this blond inflow of students into colleges that are constantly hiking up their fees to meet the demand, as well as to garner as many federal resources as possible. Moreover, these subsidized loans are encouraging students to take up easy loans, and then indebt themselves to financial institutions for a degree that they really did not need. (Kogan, 2011)

Therefore the argument is whether university education is really a public good that has to be supplied to all at rates that make it affordable, or to make it an exclusive terrain, that only those who are willing and capable can be exposed to.

Government Higher Education Loan Programs

The government of the U.S.A. has taken many steps to aid students who seek education through a variety of loans and instruments that it deems appropriate. The current President is also of the view that the enrollment numbers should be maximized in the United States.

President Barack Obama, in his 24 February 2009 address has stated his purpose to be:

"We will provide the support necessary for you to complete college and meet a new goal: by 2020, America will once again have the highest proportion of college graduates in the world." (The White House)

Before going to indicate what the President has spelled out in concrete terms for the policy that he shall be adopting for the attainment of his mission, it is important to know the various programs under which the American provide provides loans, and what their mechanics are in terms of access for students and their eligibility.

The legislation that allows the loans to be given to the students is the Higher Education Act authorized under Title IV. The loans are for the use of college and university students, who are provided the loans through the schools that they apply to. The schools assess the merit of the students who are most needy of the funds and then grant them. These loans might then be subsidized or not depending upon the financial circumstances of the individual student. The loans can be put to various uses including supplementing family income and resources, along with scholarships and grants all of them with the explicit purpose of education. The components of education expenses include the likes of dependent childcare expenses, tuition fee, living expenses and the like.

All students are eligible for federal loans irrespective of their credit ratings or their financial circumstance for both subsidized and non-subsidized loans and under each of the programs, the Federal Government gives a six-month period in which the students are not required to pay back their loan. There are various limits of the amount that can be granted to students in order to fulfill their needs, but subsidized loans are given only to those students who indicate and prove their need for a subsidized loan on easier terms. Under the conditions of the subsidized loans, the government pays the interest amount due on the student while he or she is in college which makes the loan, basically an interest free loan for the student.

When the students start repaying the loan installments, the loans enter the loan repayment mode, where the borrower is then allowed ten years to repay the amount in 120 equal payments made over a span of a decade.

Some of the U.S. Federal student loans as well as some private student loans according to the Bankruptcy Code Section 523 allows the loans to be discharged for causing undue hardship. The Code also determines which loans are eligible for Bankruptcy and which aren't, and it treats student debts are distinct from other types of debt indicating that loans taken through credit card overdrafts are different, and those taken for other purposes are different to student loans and therefore students are not given an option to declare bankruptcy on any other ground.

The clause of 'undue hardship' also requires evidence and proof, which might not be sufficient to indicate that determines what loans, can and cannot be discharged. The clause also varies from one jurisdiction to another in terms of interpretation so that the students who want to make the case for bankruptcy generally find it hard to do so, and find them under the loan for life.

As far as loans which are not subsidized are concerned, the government of the U.S.A. guarantees the loan, but the entire amount, including interest payments, which are compounded once the student graduates are paid by the student. The various kinds of loans that are available vary in terms of limit of borrowing, subsidies and interest payments.

Stafford Loans

Stafford loans have very low interest rates as compared to other forms of loans and for the year 2011 to 2012 they amounted to 3.4%. (Stafford Loan Web site, 2012) The loans can be subsidized depending upon the needs of the students. But irrespective of this fact, the loans can be repaid once the student graduates have increased borrowing limits. The details of the loans are that students are first classified as dependent or independent by the schools they go to, and irrespective of whether the student paying for his or her own education, the school, based on a certain set of detailed criteria might choose to still classify him as a dependent student. The limits for loans differ on the basis of degree level and dependency status.

Stafford loans have an aggregate limit for the funds they have borrowed, both subsidized and non-subsidized. Once the student reaches his or her aggregate limit, they are unable to borrow more funds. However, if need be, the student may repay some of the loan, lower the aggregate by a certain calculated amount, and be eligible for additional funds up until the aggregate limit that is prescribed.

A legislation that was proposed in 2007 regarding Stafford loans considered interest payments to be borne by the state. The legislation, approved 356-71, applies only to new, undergraduate borrowers of "subsidized" Stafford loans, which are available to needier students. The cuts would phase in over five years, starting July 1. If the legislation is enacted, a four-year undergraduate who starts to take out subsidized loans next fall would save roughly $1,000 in interest payments on total debt of $10,000 over a 10-year repayment term In the subsidized program, the government pays the interest while the student is in school. Less needy students still can qualify for an "unsubsidized" Stafford loan, but they are responsible for the interest that accumulates while they are in school. (Chaker A., 2007)

Federal student loans to parents

The federal government also gives loans to parents in order to help their children complete their education. One such loan is the 'Parent Loan for Undergraduate Students' (PLUS) loan, which has a higher limit which is enough for the parents to be able to completely pay for the education of their child. As with traditional loans, parents are required to start to repay the amount as soon as college starts for their children. The responsibility of repaying this loan is borne by the parents and not the students as it is in Stafford loans. Neither does the student have a partial responsibility, as is the case with cosigner loans. Additionally, the parents are also required to sign a master promissory note and non-payment of loans can have an adverse impact on the credit rating of the parents of the students overall. This form of loan can be expensive given that once the four years of college ends, the amount paid a month might rise by around four times.

New rules have allowed that the graduate students take out their own PLUS loans, but the terms and conditions of payment remain the same, and the interest rates are much higher than Stafford loans.

Federal Direct Student Loans

These are loans that come from the U.S. treasury and are also called FDLP loans. The route that these loans follow to the student is simple. The U.S. Treasury Department channels the funds for these loans to the U.S. Department of Education, and these funds are then forwarded on to the colleges or university finally reaching the students.

Nearly 80% of the schools present in the country, which includes a combination of colleges, universities and technical schools. These loans account for nearly 75% of all the loans given out to students by the federal government.

Recent Legislation in Student Debt Laws

The government of America in recent years has taken to providing loans and subsidies for higher education upon itself. The Health Care and Education Reconciliation Act is the manifestation of this and was established with the objective to expand higher education opportunities in the country for students from all sorts of backgrounds. It is an Act that was established with the aim of helping families push out of the vicious cycle of poverty, with the young members being given an opportunity to be able to earn higher than the population and helping the country's population become more prosperous. The education program, under President Obama has seen a large extension of financial support in terms of an expanded university grant program.

The President, in order to achieve his vision of American students being enrolled in college more and more has modified the components of the reconciliation act. A listing of the components that he shall be changing and strengthening includes: the Pell Grant Program, more investments in community colleges, support for Historically Black Colleges and other institutions belonging to minorities. These have all been strengthened or modified in order to help students in being able to access higher education more. The government with its aim to reduce the deficit will offset the investment by putting an end to government subsidies that are given to private institutions to give the loans, subsidies which allowed these firms to earn as much as 9.5% from the loans, when the market interest rate was much lower.

The specificities of the program include:

Larger Pell Grants

Pell grants are awards that are given under the Health Care and Education Reconciliation Act. The Government invests funds more than $40 billion in amount to these Grants and has been increasing them consistently to ensure that the government is able to support as many students as possible. These funds have been more than doubled by President Obama's being in office, as he has provided funding in the Recovery Act as well as his first two budgets. The Pell Grant has been increased, keeping in consideration the expected inflation rate from the years 2013 to 2017, and has increased the amount by 7.7% to $5,975. This means that the grants can now more fully address the inflationary pressures that the students are under, and the students will be able to grapple better with the cost of studies.

More Pell grants are planned for the decades ahead, and this new law is expected to increase the number of Pell grants by more than 820,000 grants by the end of eight years. (The White House) The President through his educational sector reforms has also sought to stabilize the funding source of Pell grants, as it happens, and has happened in recent years that the funding is in short supply, as more students are going back to school in light of the recession and the non-availability of jobs. These back to school students are those who have dropped out of the labor force to acquire more skills, but these are the people, who do not have a lot of savings and are expecting the government to save them, and to give them a better chance of survival. And this has increased the demand for Pell Grants which in turn will have to be funded from a stable pool of resources in order to be able to suffice for a greater number of students needing them.

Expanded Income-Based Repayment (IBR)

Around 67% student take loans for their education, and according to White House estimates, that average debt of students is nearly $23,000. Looking at the fact that graduate who enter lower paying sectors or have not completed their degree or is facing some sort of health problems are forced to pay heavy interest rates on their loans.

In order to address this issue, the income-based student loan repayment program was expanded under the act and those students who will take loans after July 1, 2014, will be given the chance to put the limit on their interest payments at ten percent of their income. If these payments fall short of the loan repayment amount, the entire debt will be forgiven after 20 years of graduation. There is an additional incentive given to workers who are in the lesser paying, community welfare sectors. Therefore graduates who chose to go into teaching, nursing, or in military will be able to get their debt forgiven over a period of ten years, as the government has realized that the students from lower paying sectors will not be able to pay the full amount of loan with a smaller income package. It is expected that the program will be availed by more than 1.2 million borrowers, who are eligible for this.

Other Student Loan Facilities

The government has realized the need of students and the fact that there are fraudulent practices that are being carried out by colleges and universities which are now being established for the sole purpose of getting their hands on federal government funds. To counter this problem, the government has indicated that it plans to end the subsidies given to the education institutions and instead are focusing on giving the students direct loans. These loan funds, will not be given to the institutes for disbursement, but will instead be given out to private companies which will give out the loans to the students and will participate with the Department of Education under contractual agreement. This move, according to government will free $68 billion over a span of nearly 11 years. And by eliminating waste from the system, the merit-worthy candidates will be able to get access to the loans, rather than companies which are running a scam.

The impact of the loan, The continued access legislation earlier this year raised borrowing limits under federally funded and federally subsidized loan programs - theoretically limiting students' and families' reliance on private lenders - and gives parents the option to defer repayment under the federal Parent Loan for Undergraduate Studies until six months after a child leaves school.

But eligibility for PLUS loans is now more closely tied to parents' own credit ratings, making it more difficult for some families to borrow, Rodriguez said." The parent loan market has changed drastically since last year, and it may be that if parents' circumstances change as a result of tough economic times, their own credit rating will suffer and families may find they don't qualify for as much (lending) in the future," she said. (Halcom & Benedetti, 2008)

Economic Analysis of Loans

The economic analysis will look at both the individual benefits of these loans as well as look at how they have led to indebtedness among students from the onset of their academic careers. The economics of the loan scenario has to be gauged from different perspectives, as more than the political issues, the controversy is about wasted resources, if there are any, and as with any other government spending program, this too has its critics and its proponents.

Looking at the basic statistics with regards to college fee, as mentioned previously, four-year college fees have gone up by 68% from 1986 to 2006, a period of twenty years, and yet at the same time enrollment has gone up by twice as much, indicating the extraordinary amount of burden on the national exchequer. However, in terms of these costs being translated into a burden on students' pockets, they haven't borne the entire burden of these increases due to the grants and subsidized loans, which brought the increase in cost of a college education to a 29% increase. There is a similar structure of increase that has been followed in public institutions as well. (McCluskey & Edwards, 2009)

As the number of enrollments increase, colleges have responded in time to get more students aboard, as this means more public money in terms of loans and grants. The colleges have started giving out admissions to students with lower aptitudes than were admitted previously by lowering their admissions standards. A case in point is the American Academy of Arts and Sciences which has indicated that in the 30 years from the mid-1960s to the mid-1990s the GPA of college students was increasing, but the SAT scores that were required for admissions were lowered. (Rosovsky & Hartley, 2002)

Another startling indicator in terms of the economic aspect of providing student loans is that the number of students who are graduating, with finished degrees has also fall, as students and colleges realizes, after wasting precious resources, that the students are not suitable for University education. If the admission procedures are stringent enough, such students would not have been admitted to the college in the first place, and in turn the number of people completing their college degrees would go back up. (Bound, Lovenheim, & Turner, 2007) The rate in the six years preceding 2009 has averaged a pitiful 56% implying that the critics of the federal loan programs have a point and that the students who are not serious about education, are getting into the system and making a mockery of state paid grants. (McCluskey & Edwards, 2009)

Even though the claims are clear, that there are a number of drawbacks to these loans, there are also positive aspects, both individual and state level. At the individual level, higher education broadens the scope or the horizon of the students and gives them an opportunity to go beyond their income strata's to be able to earn a higher standard of living as measured in monetary terms. As far as the state is concerned granting the rights to a wide variety of students to learn in universities can be termed an egalitarian move, where poor students might also be able to avail this opportunity and rise above their income levels. It can be deemed as a move that allows everyone equal access to a service that has the potential to change their lives for good.

Additionally the grants given to universities help them nurture possible bright minds in the society, who in turn may help in uplifting the society to a higher level of cognition and development, allowing progress to truly occur, intellectually as well as materially. A famous quote by the second president of America John Adams indicates this beautifully:

"I must study politics and war, that my sons may have the liberty to study mathematics and philosophy, natural history and naval architecture, in order to give their children a right to study painting, poetry, music, architecture, tapestry, and porcelain." - John Adams (John Adams Quotes).

This goes to explain, that while technical skills may be necessary, it is equally important to have an intellectual understanding of the world in order for the society and its culture to develop and to reach another milestone of success.

Individual Benefits and Costs of Debt Burden

Benefits of subsidized loans to individuals

Loans were given out to ease the pressure on parents and students with regards to higher education, keeping the inflationary pressures in mind. There is the obvious advantage of students being made capable enough to earn high enough revenues in their lives after graduation so that they will be able to pay -- off the debts easily. However, the time when this loan program was initiated there were a lot of jobs in the employment market, and the situation was not as bleak as it is today. It was expected that students were a sound investment where they would be loaning an amount for a period of greater than four years, and would repay the loans gradually.

Furthermore the announcement by Barrack Obama regarding repayment terms that would match the income schedule of working students was a welcome announcement, where students were given an extended time periods in which to pay back their loans that they had taken from the government. It has to be noted here that the repayment program would be for new graduates, and that the older graduates would not be able to avail this opportunity. (Day & Newburger, 2002)

Although there are certain restrictions that are imposed by the subsidies that have been discussed in the following section, there are advantages of the subsidies for individuals.

Foremost it eases the debt burden on parents and students who have taken the loans. The subsidies allow for payments which can be made as the student start earning. It is not as if the subsidies are taking away the entire responsibility of the education of needy students. Through the subsidy the government is paying their interest payments while the principal sum is deferred for returns to the institution after the student graduates and goes into the job market.

Furthermore, the stress level that is associated with taking a private loan at very high interest rates also means that even before the students start their career they are heavily indebted and any work that they do involves a lot of pressure, as they are also under the strain of earning for their livelihood, starting a new life and paying back a huge sum which takes many years to overcome.

According to an article (Schemo, 2007):

"Banks and lenders face negligible risk from allowing students to take out large sums. In the federal overhaul of the bankruptcy law in 2005, lenders won a provision that makes it virtually impossible to discharge private student loans in bankruptcy. Previously such provisions had only applied to federal loans, as a way to protect the taxpayer against defaulting by students." (Schemo, 2007)

Therefore subsidizing their loans would make it easier for them to pay back their loans. Moreover, if they are not spending a large chunk of their income in paying interest to the banks and back to the loan giving authorities, it would show up in the economy as increased spending, which in turn would help in boosting the economy.

Loans are a burden on students, who have the basic purpose of studying. However, when students have to worry about the rising cost of debt and the loan repayments that they will have to make at the end of their academic careers, and at the beginning of their professional lives, they find themselves divided between studying and worrying about the loan sum that they have to pay back. This creates a basic waste of the resources, as students can't perform to the standard expected. In such a scenario, the students, when given subsidies, are more relaxed compared to having regular loans with high interest payments accruing in their banks records. Therefore the subsidies help in the achievement of the objectives of the students, enabling them to have less anxiety and hence perform better in their studies.

Costs of Debt Burden:

The individual costs of the debt burden can also be in terms of the higher frauds that universities are doing in the for-profit sector. A few studies that have been carried out in order to determine the integrity if the system in the for-profit sector, there were incidents where investigators posing as new applicants were encouraged to fill out incorrect information in four of the fifteen such institutes studied. The incorrect information was mainly related to financial information, which the Government Accountability Office (GAO) investigators were encouraged to fill by the university people. Moreover the universities also did not indicate correct or full information about their cost structures and misquoted facts and figures that pertained to the students being able to find jobs after graduation.

But the problems with these for profit institutes, that have mushroomed to take advantage of easily available federal dollars for education, do not end here. These schools also have a very low percentage of students completing their degrees. The percentage of those who are graduating in six years from these for profit colleges are much less (38%) as compared to public (53%) and private not for profit colleges (64%). (Maher, 2010)

These institutions are also responsible for encouraging students to take on loans for their studies. The advantage to the institutions in students taking out loans is that when the current students do not have to bear the burden of their entire fee, and are instead subsidized by the state, potential candidates are also lured into the trap, thinking that they will be able to get away with taking the debt easily. However, these students then have to suffer the burden of a loan that they took to get a degree which is not worth much in the market, due to the down-market reputation of the institution that they completed their degree in.

Some statistics indicate the entire story simply. Put numerically, "in 2009, students at for-profit colleges received more than $4 billion in Pell Grants and more than $20 billion in federal loans provided by the Department of Education." (Maher, 2010) Additionally, federal student aid money accounted for a startling 89% or more of total revenue for the for-profit colleges. (Maher, 2010)

And these problems are just the tip of the iceberg for students who took out loans, as can be evidenced by the out-of job graduates, who are finding it very difficult to repay the loan, as more and more graduates are flooding the market, so that there is excess supply, bringing general employment level and wages down. Consider also that: (Maher, 2010)

"About 12% of U.S. college students attend for-profit institutions -- but these students account for about a quarter of student loan dollars, according to a study by the Institute for College Access and Success (ICAS) cited by BusinessWeek." (Maher, 2010)

Country's Benefits and Costs of Subsidizing Student Loans

While there are obvious advantages to individuals for seeking higher education, there are related drawbacks as well which come about with the cost of the Debt burden that students end up paying.

The benefits of subsidizing student loans to the country

The benefits are that the government will be able to allow a smaller portion of the new graduates' salaries to go into paying interests and repaying loans, which in turn would help in pushing up aggregate demand, through increased consumption spending due to the increase in disposable income.

This is pure economic rational, however, there are other underlying factors too that would be affecting the economic benefits of subsidizing loans. Foremost, the subsidy allows for greater acquisition of knowledge, and a larger more skilled workforce which will be able to push for greater productivity in the industry and service sector, and will result in overall improvement of the industrial sector. As more resources are invested in getting students to educate themselves and as access to colleges and education is made easier, there will be a higher probability, through higher student numbers that some of the bright minds in the country will emerge, and help in technological and other advancements. According to (Barrow & Rouse, 2005):

"Changes in technology increased the productivity of high-skilled workers relative to low-skilled workers, raising the relative demand for the former. Therefore, relative wages for high-skilled workers rose, while those for the less-skilled declined." (Barrow & Rouse, 2005, p. 4)

Moreover there are implications for the choices that graduates will make in their careers. For example if a student has taken a loan to finance his or her studies, then they will try and make sure that they get a job the first thing they graduate in order to be able to start paying back the amount that they have accumulated in the loan immediately as the payments start getting due then. This limits the choices that they make for their employment, and their choice of a career mainly follows the parameters of making them able to earn enough money to support them and to enable them to pay the loan installments. This means that jobs that are starting slowly, where income earned is low at first and then gradually increases are sectors that students will not be looking at, even if they are beneficial sectors for the community at large. Consider for example that the graduate wants to get involved in community work, but he realizes that he cannot because he has to earn enough money to pay back the loan, and the society is deprived of some constructive work that could have taken place for the greater good of mankind. A real account of a student stuck in such a dilemma was published in the New York Times (Schemo, 2007):

"When Ms. DiPoi graduated from Tufts University in Boston, she found out. With interest, her private loans had reached $65,000 and she owed an additional $19,000 in federal loans. Her monthly tab is $900, with interest rates topping 13% on the private loans. Ms. DiPoi, now 24, quickly gave up her dream to work in an overseas refugee camp. The pay, she said, "would have been enough for me but not for Sallie Mae," her lender." (Schemo, 2007)

Additionally students and graduates might also not be able to start up their own businesses after graduation as they would have no capital to invest in the business. The income that they earn would be used in some ratio to pay back the debt.

Additional loans would be difficult for the initial startup as well as the credit rating of the student would start with a negative due to the loan he has accumulated over the years. This in turn would mean that the society is losing out on potentially new sources of income and for employment. Subsidizing the loans, and making them match the income levels of students better would mean that the students have more income in their hand to invest, and that they would have some sources of financing available sooner rather than later.

The subsidies also address the concerns of the government and of the public at large, where new students would be encouraged into taking up majors and specializations in areas which are lower paying, but those which are better suited to the interests and the strengths of the candidates. This would in turn accrue as a benefit to the country at large, which would not have a large number of people competing only for lucrative disciplines, but also be encouraging to students so that they may be able to work in other, less lucrative and yet socially beneficial disciplines.

The costs of subsidizing student loans to the country

These have been made apparent in the paper previously and will be expounded in some detail here.

Foremost is the fact that government intervention causes interference in the normal functioning of the market in which universities operate. University education is not a public good, and access is restricted through high fees and admission tests that screen out candidates that are capable of going ahead in their educational careers. As time passed and the labor force in America got more crowded, new entrants into the market sought to increase their skill set in order to be more valuable in the market. However, as more and more Americans have enrolled in colleges, fees have been pushed up. Under a competitive environment, the rise in fee would have generally cushioned off the excess demand, however, the rise of subsidies has meant that more students can now afford to go to college. Take a look at the diagram below:

S(Ed)

Excess demand

P

S

D(Ed)

As it can be seen, the subsidies lower the price of attending college below the level of the equilibrium price and in turn make the case for excess demand that arises as people's budgets for higher education are expanded. This is the reason why enrollment has increased, despite the fact that some students might really not need a university degree. (Vedder, 2004)

There are other costs associated with this phenomenon as well. There is the fact that as the federal government is paying for the students' fees and in some cases is sending the grants directly to universities to be awarded to the deserving candidates, there is a need for managing these loans that are given out to students. This is the reason why there has been a recent trend of rising federal regulatory controls and the need for managing these from a state and a federal level. In fact, the Federal agencies, in the excitement to further university education have also called for a need for national standards.

Now imposing national standards might seem like an egalitarian move, where all universities' standards are brought to par, there are serious flaws with this motive. Foremost, standardizing all universities at the same level would mean the end of competition among all the institutions as none would strive to compete against the other for nationwide rankings. Moreover, when universities are brought to par, there are some which are ruling the roost through their high quality teaching faculty, and they might have to tone their curriculum down in order to be able to match with the rest of the players, and this downgrade in quality will not be helpful to anybody.

Additionally it creates the need for more resources in terms of management from the Fed, as at least one ministry has its work cut out to manage the disbursement of loans and looking after the collections, and the collection policies of the same from students in order to recover the costs incurred by the state on them.

Moreover, as the government does not have the expertise as private financial institutions do in recovering debt and analyzing people for their creditworthiness, there is bound to be theft and fraud. Such cases come to light every day, indicating the magnitude of the waste to which the taxpayer's money is sometimes put to. There are incidences of fraud as well, that have come through in the past few decades. One such example was in the early 1990s when the trade school American Career Training Corporation in Florida admitted new students from places such as housing projects and from unemployment offices. The school collaborated with these fake candidates and helped them to take out federally funded loans. The owners of the school had their cuts from these millions of dollars which they helped the students access, pocketing most of the money. (McCluskey & Edwards, 2009)

In fact such examples are rampant as some universities are set up only to avail these grants and federally funded money which is not as strictly regulated. There are indications that scams are easily administered and the education ministry has come under criticism for being inadequate in its policies towards loan disbursement and collection. (McCluskey & Edwards, 2009)

Political Analysis of Loans

This section deals with the stance of various politicians and their indications of what they feel the future of education particularly higher education should be. While there are candidates that have criticized universities, and some which have indicated that the financing should be directly to the students, the overall perception is that while there are high economic costs as indicated in the above sections, politicians, in light of the election year are not going to be keen on footing a bill that eliminates student aid, as it would lead to a reduction in vote count.

The detailed analysis of the politics of this business includes the politicians and parties that are closely associated with the subsidies, including Hillary Clinton and Obama, as well as those, such as Bush who sought to cut back these subsidies in order to stave off excess demand.

The Democrats, have used the scandal of student loan debt and the for profit university scam to propose the idea that all loans should be federally granted and that instead of giving them directly to the institutions, the government, taking the place of private financial companies, have indicated the plan of granting student loans themselves. This again means a lot of the government bureaucracy and red tape entering into the system, creating loopholes for students who might just end up wasting resources. The Republicans are opposed to this, as it would mean that private institutions lose control over student debt, which is not in favor of the ideology that they stand for. And in order to do this they have voiced their support for private lenders vs. government sourced loans.

There is also a Moral Hazard associated with this kind of loan forgiveness. The students who take loans, avail the benefits via their choice of studies, and then declare that they are under too much pressure and can't pay back the loan. If the government then excuses them, or gives them subsidies, then this sets a precedent for other students who might take up loans with the intention of not paying it back.

Even if they do intend to pay the loan back, the students might not be very pushed to finding a job that would enable them to pay the loan and will seek subsidies to lessen the loan amount, as they know that in the end, the government will forgive their loans and the students won't have to worry about anything. The fact that the subsidy could hinder their productive search for work is an alarming fact indeed, and can prove to be a huge burden for the country.

This is a matter of political debate as republicans support private lenders who are earning revenue based on the loans that they give to the students. These agencies in turn are the ones who are lobbying for their interests, and are the funding partners for some republican candidates, leading the entire issue to a new political level.

Politicians/parties most closely associated with programs

Both the Republicans and the Democrats are pushing for higher education but both have a different ideology when it comes to the students being able to pay for the studies that they are doing. The Democratic presidential candidates and the President himself are forging ahead with their ideas that the middlemen which are the commercial banks and lenders, giving our higher priced private loans to students should be eliminated from the system, and that there should be direct loans from the government to the students either subsidized or non-subsidized, but that they should be made to the students alone. Moreover, they are also trying to eliminate the process of giving funds to universities which then give forward to students; this in turn will eliminate waste from the system.

Hillary Clinton, when she was running for president has also outlined her plans for making college more affordable to students. She had indicated the need for a special tax credit that would allow for the aid of students and proposed for the simplification of the aid package application, so that students may be able to get the loan without facing harassment in terms of the amount of paperwork required to get the loan.

She was also proposed the elimination of the Federal Family Education Loan Program which is the loan program that allots student loan subsidies to commercial lenders such as Sallie Mae to distribute federal loans to students. Barack Obama and John Edwards too had similar proposals for their election campaigns, so that during his tenure, Barack Obama has sought to eliminate the role of commercial lenders and banks.

The rationale for this program was that the financial aid given to students would be made available at lower rates and at the same terms without the FFEL program, and would yet be able to pay the funds paid by the American government in terms of subsidies given to commercial lenders, who were already earning a high interest on the amount of the loan that they are giving to students. Moreover as these commercial lenders are giving out private student loans, where students are not protected by bankruptcy laws, there really is no need for the subsidies to be given to them. (Chaker A., 2007)

In response, commercial lenders have argued that the subsidies given to their industry is passed on to the consumers, who are in turn able to give the students tax rebate and other reductions in payment terms. Additionally they also indicate that the FFEL subsidies given to commercial lenders enables them to give students more incentives than those that are given under the direct loan program so that the students will stop benefiting from these once the subsidy is eliminated. They also claim that students will then be left with no choice to borrow privately, as commercial lenders, without the subsidies will not be able to offer them the discounted rates, and the students will have no alternative in case a federal loan in not granted. Instead they will have to rely on very expensive consumer loan to finance their studies and this will be detrimental to the overall objective of making university education accessible to students. (Chaker A., 2007)

Additionally other critics have also argued in favor of the FFEL programs stating that direct loans to students had very poor service quality and once the FFEL program started the quality of these programs improved drastically, as the firms had more funds and an incentive to be able to provide the loans to students in a more conducive environment. But at the same time, the experts also indicate, that the government run program is also faced by competition from the private sector which has worked on student borrower segments and hence it has to keep up its image in order to be able to garner a larger share of the student borrowers.

Another spokesperson for a student loan provider, Eric Solomon, speaking on behalf of Nelnet Inc. indicates that "In the long run, eliminating the bank-based FFEL program "would eliminate choice, forcing schools to operate under one government-run program." (Chaker A., 2007)

A special counsel for the Arlington, Va.-based Consumer Bankers Association: John Dean, as quoted in Anne Chaker's article has indicated that "Not only are you going to eliminate competition, but there's another factor: What if the system fails?" (Chaker A., 2007)

There are counterclaims to this argument posed by lending experts and government officials who are of the view that the conditions of these incentives are so strict that very few students actually qualify for the loans, supported by the fact that the Sallie Mae Corporation gives these benefits only to ten percent of students. (Chaker A., 2007)

Moreover (Chaker A., 2007):

"For its part, the U.S. Department of Education says it is reticent to take on the added burden. "As the regulator of both FFEL and [Direct Loan], we want to ensure both programs stay healthy to better serve consumers. At a time when families need options, maintaining two viable loan programs is critical," said Diane Jones, assistant secretary for postsecondary education." (Chaker A., 2007)

There are other views on this as well. Some, such as Luke Swarthout indicate that the candidates' proposals all look at a change in the system, more like an overhaul which is needed in order to run this aspect of the economy better.

It is also expected to hurt the bottom line of lenders such as Nelnet and Sallie Mae. Already, due in large part to recent cuts in federal subsidies, a group of investors led by J.C. Flowers & Co. has cut the offer price of its initial bid to buy Sallie Mae at $60 a share. The matter is in litigation.

The Federal Direct Loan program was launched in the early 1990s under President Bill Clinton. The idea, in part, was to create a financial-aid distribution program that would be less expensive to taxpayers. By lending directly to students, the federal government would have no need to subsidize the banks. The new program resulted in competition for students, which was also expected to ultimately benefit consumers with discounts and better service.

The FFEL and the Direct Loan program therefore are two competing programs that are working on helping students meet their educational expenses. The schools were initially involved in the fund disbursement projects, which have now been eliminated by President Obama. The ley problem there can be indicated from the fact that the Direct Loan program was gradually decreasing in market share as the FFEL program took over. Now this was because schools were allowed to choose their own program, whichever one that they wanted to resort to, and the schools were steadily opting for more FFEL programs, indicated by the statistics that 80% of the market was taking loans and (Chaker A., 2007):

"In the past three academic years, the number of FFEL loans originated has increased 23% to 11.2 million, while the number of direct loans has decreased 8% to 2.7 million."

One of the reasons that were cited for this change in preferences is that the lenders and the schools were colluding with each other, in order to get a better end of the deal. The lenders and the school administration members were covertly making deals which were corrupt in nature involving bribery so that the schools would increasingly chose FFEL programs. In response to the fact that a probe across the nation by Attorney General Andrew Cuomo led to settlements between lender and schools to reach $13.7 million where an added sum of $3.4 million was given back to the students who were being taken an advantage of.

Looking at this scenario, the democratic government of President Bush also passed a resolution stating that interest rates would be slashed, and that Under the College Cost Reduction and Access Act of 2007, grants to students would be increased based upon their financial needs. These funds would be generated by reducing the subsidies that were granted to banks and other lenders.

As far as Republican leaders are concerned Howard P. McKeon of California had previously introduced legislation which would involve sanctioning against schools that raise tuition too much.

Mitt Romney, a significant player in American politics has raised his concerns for eliminating the FFEL program as he feels that the program is encouraging for competition and that is supported by former New York City Mayor Rudolph Giuliani who also felt that choice was an important factor in students being able to take up student loans. (Chaker A., 2007)

Arguments used to support programs

The arguments that are being used to support the programs are political as well as economic in nature. The candidates who support the program, want subsidized loans and are reluctant to give it up entirely to the market have their own interests at heart as well. This is because polls are near, and none of the parties would want an adverse effect on their votes due to their take on the student loans. Maybe that is the reason why the Obama government too chose to expand the system of loans and grants as well as subsidies in order to encourage the young population of America as well as the parents segment of the nation to vote for them. Any discrepancy and changes in law that might affect the voter population in terms of reduced loans and student subsidies will likely be put on the congress so that the Republicans don't lose their popularity before election year. According to Bruce Merrill, a senior research fellow at Arizona State University's Morrison Institute for Public Policy, (Nowicki, 2012) if the interest rates on student loans are increased to match market rates for federal loans, there might be an uproar and it could cause a loss in the voter bank for the candidate proposing such a hike in prices.

Moreover, the youth still look up to Obama and his pro-student policies, and for that matter if the loans are not given on softer terms the public might not blame Obama even if his team might be responsible for it. The Obama team on the other hand too would not be accepting any of these claims and would likely hold the congress responsible for not being able to extend the student loan for the benefit of the students.

Past experiences of those trying to cut programs

Since the 1990s American education centers have seen a trend of privatization, and competition which is the hall mark of this capitalist economy. The universities that have been functioning in the country are market drives, and competitive based on prices as well as on the type and kind of courses offered.

However, as the university market has emerged in the country. So has the education finance market as more and more American students start enrolling in institutions of higher education.

The need for financial help has arisen over the years, as the tuition fees went up as a proportion of the household income. According to Geiger & Heller, (Geiger & Heller, 2011):

"By 2009, these proportions had increased dramatically. A family at the median income level would have had to pay 44% of its earnings to afford the average-priced private non-profit 4-year university, or almost two and one-half the proportion of its income in 1980. In the public 4-year sector, the rise in the proportion of income need to pay the tuition was even greater, increasing three times from 4% in 1980 to 12% in 2009."

While these loan programs have taken off as the times have changes and the private colleges and universities have mushroomed as well as tuition fees have increased as a proportion if household income, The Bush government, in a bid to stave off excess demand and control the country's fiscal deficit announced cuts in student loans to take place. In the political arena, the Republicans hailed the bills a good move, which would halo the country in controlling inflation.

Democrats on the other hand revised for the bills as they said that technical amendments were needed before such budgets cut could be passed. The revision of student loans and the subsidies awarded to students was perhaps the measure of the Bush Government that lost him support from the households and the college going students' especially themed income bracket that would not qualify for federal loans, and yet did not have enough resources to pay the tuition fee completely. (Taylor, 2006)

Looking at the unpopularity of the Bush government's moves and the fact that election time is near, there are indications, that despite the economic disadvantages, the loan schemes and more importantly the subsidies are likely to continue.

The Obama government won its election based on the motto of change a promise to the youth which has radical views that things would be different and that America would regain its former glory and goodwill among the nations of the world. Keeping in view the promises that he made, and the fact that he comes from an ordinary background with middle income sources, he too had a tough time in college and him and the first lady had accumulated debt in college and when they got married the debt got accumulated together. He identifies this in his speech and indicates that he has been through the experiences of the college students and that he will make sure that the students do not get a raw end of any deal offered by the government.

Therefore looking at his voter's bank where voters are mainly college students and as enrollment figures rise there are more and more households that are facing the problems in financing their children's studies. By discontinuing the program or by not giving the students any subsidies the government will end up isolating its voters, and as election year is around the corner, the parties cannot afford to cut subsidies.

Therefore instead what they are now focusing on, is the fact that the loans not be given to the institutions who misuse them, but to the students directly in accordance with their need, at a lower interest rate, and give them subsidies, which will be more affordable by the state itself as the wastes in the sector go down.

Current candidates' statements on loans

There are various views that republican and democrat candidate have taken on the students loan issue. The stance of five presidential candidates is different in terms of their perspectives of the utility of university education. As far as the current President goes, he has indicated that he wants more students to be a part of higher education institutions and that America have higher enrollment rates in the future. More specifically, as concerning subsidized loans, President Barack Obama supports the loan forgiveness plans, but has indicated the need for subsidizing loans for graduate students, by providing them funds at very low rates, and the repayment schedule matching their income streams. He also has outlined the fact that students loans will be forgiven after twenty years of constant and consistent payments and 10 years for students working in arena's which involve community welfare.

Newt Gingrich has harshly criticized Obama and his plans to provide aid to students. In strong words, he has called it a "Ponzi scheme." (Poll: Who Has The Best Solution For Dealing With Student Loan Debt?, 2012) He indicates that there is a need for privatization of student loans as it gives more choices and freedom to the students rather than just direct loans. He has also specified an alternate model of university to be applied such as the College of the Ozarks in Missouri which is based on working and education being hand in hand, so that when students graduate they are not burdened with loans.

Ron Paul indicates that there should be no federal funding of higher education. Considering that it is unfair to tax payers who have not attended college and hence have lower salaries. He is of the school of thought that the aids will go to subsidize those students who already have a better chance of earning more income than the rest, and penalizing those who were not able to avail university education is unfair on their pockets and that they should not be made to pay, as this goes against the concept of an egalitarian society with better income distribution. His viewpoint will appeal to the various school drop outs and unskilled workers, who already have a very slow and smaller stream of income.

Then there is Mitt Romney who has indicated that he prefers the model of universities that are for profit in their approach, and has indicated that for Profit Colleges encourage competitions in the industry and supply the demand in the country which is not met by public colleges. According to him, this for profit enterprise enables access to higher education under a competitive regime. Moreover, he has said that if for profit universities emerge, they will increase supply and hence help in driving down costs of tuition fees down. Moreover as federal intervention lessens, there will be more room for market forces to be able to work.

Then there is Rick Santorum who thinks that universities are breeding anarchical thinking and that the government should have no involvement in subsidizing students to go to such places, indicating his disgust for subsidizing an institution he thinks is fundamentally flawed.

Some of the statements of various candidates and senators are mentioned below:

Rep. Raul Grijalva is a representative who works for the House Education and Workforce Committee has said that (Nowicki, 2012):

"I think there's some urgency to it, and, hopefully, students and families across this state and the country are going to put enough heat on Congress that the Republican leadership will let the legislation to extend that get to the floor," and that (Nowicki, 2012):

"I hope there is a backlash, and I hope people don't let this go under the radar because it is going to deny (college) access to many, many middle-class and working families. That dream will disappear. And if we let the rates go up, it's going to make it more difficult for people to go to college." (Nowicki, 2012)

According to Ron Paul, a Republican candidate (Bachmann, et al., 2011):

"Well, I think you proved that the policy of student loans is a total failure. I mean a trillion dollars of debt? And it's going to be dumped on the taxpayer? And what have they gotten? A poorer education and costs that have skyrocketed because of inflation, and they don't have jobs. There's nothing more dramatically failing than -- than that program. So, no, there's no authority in the Constitution for the federal government to be dealing with education. We should get rid of the loan programs. We should get rid of the Department of Education and give tax credits, if you have to, to help people." (Bachmann, et al., 2011)

He also added, to a question of how education would then be paid for in light of the fact that there is inflation, and that many students would not be able to afford the tuition, the candidate indicated that tuition would be paid for the same as computers and cellphones were paid for. He also added that when the government got involved in providing any service, be it education or medical care, it led to the rise in prices and led to a downgrade in quality, causing a sort of a bubble, as it sucked in federal reserves, making it into the total disaster that is apparent today. He said that it was the marketplace that encouraged competition and by putting up education in the market place for competition, the prices would go down and the quality would go up. (Bachmann, et al., 2011)

Newt Gingrich has also agreed to this stance and has in fact put in an example of a model university structure in the following statement (Bachmann, et al., 2011):

"Now, let me give you a contrast that's very startling. The College of the Ozarks is a work-study college. You cannot apply to it unless you need student aid, and they have no student aid. You have to work 20 hours a week during the year to pay tuition and books. You work 40 hours a week during the summer to pay for room and board. Ninety-two percent of the student's graduates owing no debt; the eight percent who owe debt owe $5,000 because they bought a car. Now, that is a model so different, it will be culture shock for the students of America to learn we actually expect them to go to class, study, get out quickly, charge as little as possible, and emerge debt free by doing the right things for four years." (Bachmann, et al., 2011)

Rick Perry is of the opinion that (Bachmann, et al., 2011):

"I don't think the federal government should be in the business of paying for programs and building up huge debt out there. I think we need to look at, how do you force these universities to be efficient? And one of the ways is that the governors who appoint the trustees, they step in and they basically say, listen, you are going to have graduation rates that are moving upwards, you're going to have tuition that is moving down. You have to have control over those boards of regents, of that's how you do that, or the legislature has to have control."

Therefore, he too agrees that the role of the Federal government in these cases should be minimized so that the government can take care of its deficit, and channel these resources into avenues that are more cogent in terms of actually improving the economy, and bringing it out of recession.

Summary Analysis

The paper has considered the economic costs to individuals and to the country of subsidizing these loans and has concluded that individual students are taxed heavily through interest rate payments which are compounded annually, at the very start of their careers, leading them to make choices, that might not be the best in terms of community welfare.

This accrues are an opportunity cost to the country, which also suffers as tax payer monies are channeled into helping students cope, rather than be disbursed in a system where they are allocated to the poor. The paper has also realized the need for looking at political stand point and the fact that the funds that are being used to subsidize the students are actually being used to gain support in the elections.

That is the reason why the candidates and the representatives of the two parties have really not gone through a through economic analysis, and have instead focused on the emotions of households and of people, as indicated by President Obama's vision. Therefore the paper concludes that it is unlikely that the government will be cutting down on subsidies, as its existence in the seat of power depends upon popular support.

Review

There are very strong arguments that are being made in favor and against subsidizing student loans. One commentator has indicated the five levels of repercussions that the subsidies are expected to have, and the fact that loans might be forgiven have also given rise to incensed opinion-based pieces and columns. (Wolfers, 2011)

According to Justin Wolfers (Wolfers, 2011) the five aspects that make for the fact that forgiving student loans might be a bad idea are: distribution, macroeconomics, education policy, political economy, and politics. The author is questioning the basic premise on which the argument of the subsidies is based. According to him, the logical reason that the proponents of subsidies and debt forgiveness are that it helps in better distribution of income as students are allowed to participate more in higher education, and those who are from poor families are able to afford education and are able to earn higher incomes. However, the author argues that the people who will already be able to earn higher incomes should not be granted subsidies as it would increase income inequality. Additionally, in terms of giving out money to people who need it the most, the author indicates that a better sector would be high school drop outs as their earnings curve is pretty much constant throughout their careers.

The next argument questions the macroeconomic feasibility of the issue at hand. He says that the government based on the rational that the loan forgiveness and subsidies would give the students higher disposable income and provide a stimulus to the economy, is wrong. He indicates that if a fiscal stimulus needs to be given, it can be done so to more needy groups of people, who would spend the money immediately as they have immediate needs to satisfy. Additionally, if the graduates are given subsidies, they will use the added room in their financial space to save rather than to spend; resulting in the accumulation of wealth, rather than the mush needed spending. S He also indicates that spreading the amount, in small relief packages will have a higher chance of getting spent as compared to allowing students to take up a large amount individually.

The author also argues in terms of the education policy that such a move perpetrates. Getting out of loans so easily or having the government spend so much on subsidies will not lead to more students getting enrolled. This is because the proposal to forgive the loan is for people who already have an education and are now looking to somehow waive off their education expenses having the Federal government pay them.

There is also the issue of regards to the political economy as indicated by Justin Wolfers in his article that allowing for forgiveness of loans and subsidies there will be more lobbying for money from the Fed, if the trend is allowed to continue. The political element in this addresses the issue that the college students are asking for free money which will only breed ill will and more bureaucracy. Red tape and lobbying, all of them are activities that are the least productive. (Wolfers, 2011)

Considering these economic factors, it is a wonder that the politicians of the country are still aiming for very modest cuts in spending, and those who are voicing concerns are also not doing so openly. For instance several candidates have indicated that the federal government should not be involved in administering the institutions, but none has said that the loans or the subsidies should not be provided to students. All of them have mentioned the cutting out middlemen who are the institute committees and commercial lenders, as the public perception of corporate America is already considered in a negative light by most Americans.

Movements such as the Occupy Wall Street have led to an indication that the public is thinking consciously about the activities that the government is undertaking to spend their precious money, and in light of the fact that banks and financial institutions were not punished for their greed and leading to the recession, people are increasingly harboring ill-will against large corporations and mercenary lenders.

If the government or any other candidate, in such a scenario indicates that subsidies should be eliminated and that households should be left to their own devices, is risking suffering a dent in his or her publicity and for this reason will not support the cause of not giving students any financial support. That is the reason why the center of their rhetoric is the organization and the institution and not the individual.

Future predictions

Given the disadvantages and the advantages discussed in this paper for and against subsidized student loans, one thing is certain. And that is the fact that the subsidized student loan regime is bound to change. This is because, having learnt lessons from the crash of the housing market, and the predictions that are being made by experts in the field of fresh graduates getting suffocating under the mounting debts.

America is at a stage today where it cannot afford to ignore the problems of this large body of students who are indebted from the start of their careers. There are calls for blanket forgiveness of all the loans that the students have taken is in order to ease the burden on them. However, this would mean that fraudulent institutions and students who are not serious about studying will also be able to take advantage of the tax dollars and waste large amounts of government resources in unproductive activities.

Then there are problems associated with the fact that if the students are not forgiven their loans, and they cannot be protected under bankruptcy laws, meaning that they live under constant pressure of debt, especially if their income levels are lower. As graduating students for a part of the labor force, and if they use a huge chunk of their money to pay back their loans there is going to be a recessionary trend in the economy. So what should be the future of the subsidies and the loaning industry in general?

One of the options that are given is to ease the debt burden by granting bankruptcy protection. According to the Economist magazine's views:

"One option is to change the bankruptcy laws. In America, Britain and elsewhere, these treat student debt as a special case: unlike other forms of debt, it cannot be wiped out. If student debt is not to shackle existing graduates and put off future ones, the rules could be changed so that it is dischargeable in bankruptcy. Yet the reasoning behind the current bankruptcy provisions is logical enough: education is an asset that cannot be repossessed and that keeps on benefiting the individual through his or her lifetime. Some worry that graduates would rush to declare bankruptcy, handing losses to taxpayers." (The Economist, 2011)

There is also another option which looks at restructuring the repayment of loans. The debt repayments are currently designed to follow a fixed monthly schedule that is divided over twenty years in equal monthly installments. So a second general trend might be that the government might take a cue from Britain and Australia. In these countries the loans are repaid based on reaching a specific income level. Therefore, once the graduate who has taken a loan reaches a certain threshold of income, the repayment of the loan starts. This makes giving out loans more appropriate, and students from poorer backgrounds too feel encouraged as they start repaying the loan once they are able to provide adequately for themselves. It makes more sense especially in relation to the current environment where jobs are scarce and it is difficult for new people to find jobs which are well-paying. It will also encourage students to go to work in sectors that don't pay very well in the beginning but have higher returns later in their career. These points to the fact that income-based repayment will become the norm rather than the exception, especially in light of the fact that the Obama Government has already proposed such measures.

The Department of education has not been able to manage the issue of student loans in the best of manners, and wastages as well as fraud in the system are rife. Some experts feel that the government should stop intervening in trying to provide university education for all students, instead, the critics of loan subsidies opine that the loans and grants should be scrapped completely, as it falls out of the domain of public goods provision, and instead the government should focus on letting the market work do its work. The government could act as a regulator or a monitoring agency as it is in general business industry, as running universities or providing them with funds is merely a waste of resources. (The Economist, 2011)

The experts opine that students who are capable will then be able to rely on private lenders as well as on philanthropist activities that might help the students who are genuinely capable to go through college. (McCluskey & Edwards, 2009)

There are also indications among the debate that is being going around among presidential candidates that the state might withdraw out of the education system and financing programs, especially as far as providing funds to private lenders at discounted rates. This move is seen in a positive light by critics of subsidies who would not be able to argue when students get the loans directly and hence are subject to vigilant screening.

According to Mark Kogan, (Kogan, 2011) the future of this industry will be slow to change. This is because the government is involved at a deep level and retrenching itself from an issue that impacts all households in America is going to be tough. Moreover, for the politicians who actually suggest such a measure will risk losing public support if they are running for offices, and may be it is this principle agency problem that is leading on to the reluctance of the government to take a hard stand, even though hit knows that resources are flowing out of the system without any productive output.

Another factor here is the recession, which has blown the budgets of households awry, so that very few can actually afford to send their children to college without any federal grants there to help them. Therefore there will be public pressure from some fronts to keep up federal governance in this area. At the same time, public and private colleges are both looking for higher federal dollars, and there being no check on the rising fee and there being no fee regulator, universities are free to do as they please. This means higher fees, so that higher federal dollars can be earned, as shown by the statistics indicating that the burden of higher fees is borne mostly by the Fed and not by the students themselves. Some authors have even compared the situation to what is happening in the health care sectors, where patients are lining up for treatments and surgeries that they do not necessarily need.

In the case of colleges and universities as well, the colleges are lining up their facilities with unneeded accessories such as fancy gyms and entertainment avenues which are luxury services for the students, which is a waste of money, as no productive work is coming out of such services being provided to students. In fact at best, they function to distract students from the responsibility that they are there in university to fulfill. Instead there are increase incidences of university students getting sidetracked in their education careers and indulging in drugs and drinking.

On the flip side, these institutions cannot be blamed for being greedy, as access to money is made easy. Moreover, as there are no jobs in the market, high school graduates are finding it easier to enroll in college with the help of government dollars than start working. This is hindsight is leaking precious spending dollars from the economies, and concentrating them in the hands of a few universities, increasing the income gap, rather than decreasing it.

However, owing to the fact that political interests are entrenched in this sector heavily, so that anyone who dares to bring a change might be taken as a scapegoat by others, which is the reason why the government is continuing in the same stream and overlooking the excesses in this matter.